TUESDAY
World economy hesitating at new crossroads APRIL 3, 2012
A SENSE OF RELIEF AFTER THE ACTIONS OF THE conflicts. In the United States, the Federal Reserve seems
EUROPEAN CENTRAL BANK (ECB) dominated the mood to be in a relatively favourable position right now. The
of the world economy in the first quarter of 2012. By economy is slowly gaining strength; for example,
launching unlimited three-year loans (the long-term unemployment is falling and construction activity is
refinancing operation, LTRO) to euro zone banks, the ECB increasing. In an environment of low inflation pressure
has gradually eased worries about a paralysing credit and plenty of idle resources, the Fed still has enough
crunch. The March accord on new bail-out loans to flexibility to emphasise the fragility of the upturn.
Greece and the agreement to enlarge the resources of Announcing that key interest rates will remain low for an
euro zone bail-out funds have removed further short-term extended period enables the Fed to push down the entire
concerns. Developments in the real economy and in yield curve, while holding the door open for a third round
financial markets have confirmed our main message in of quantitative easing (QE3). In the short term, there do
the February issue of Nordic Outlook (NO): that the not appear to be especially big credibility problems related
recession will be limited to crisis-ridden euro zone to inflation, asset price bubbles or soaring government
countries. In the updated forecasts for various regions we debt, although the Fed must again face the issue of exit
have presented in recent weeks (Macro Update), our strategies sooner or later.
revisions compared to NO have been small. We have
made upward revisions for Japan, Germany and Sweden,
among other countries, but our global growth forecast for
2012 remains unchanged at 3.5 per cent in 2012 and 4.0
per cent in 2013 (adjusted for purchasing power parity).
Global GDP growth
Year-on-year percentage change (February NO in brackets)
2010 2011 2012 2013
United States 3.0 1.7 2.5 (2.5) 2.5 (2.5)
Japan 4.4 -0.7 1.9 (1.7) 1.3 (1.2)
Germany 3.6 3.0 0.7 (0.4) 1.4 (1.3)
China 10.4 9.3 8.7 (8.7) 8.9 (8.9)
United Kingdom 2.1 0.8 0.4 (0.3) 1.4 (1.4)
Euro zone 1.8 1.5 -0.6 (-0.8) 0.8 (0.7) THE SITUATION IN THE EURO ZONE IS MORE
Nordic countries 2.9 2.5 1.0 (0.9) 1.9 (1.8) COMPLICATED. It is possible to single out a number of
Baltic countries 1.1 6.2 2.0 (2.0) 3.2 (3.2) threats that may interrupt the current positive trend. If the
OECD 3.1 1.7 1.4 (1.3) 1.9 (1.9) recovery in Germany gains further momentum, south-
Emerging markets 7.3 6.2 5.7 (5.7) 6.0 (6.0) north decoupling may create difficulties for the ECB in
World, PPP 5.2 3.9 3.5 (3.5) 4.0 (4.0) terms of finding the right monetary policy trade-off. There
Source: OECD, SEB are also various types of political risks related to
maintaining the crisis strategy that has now been
launched. The Greek crisis now appears manageable,
THE WORLD ECONOMY NOW SEEMS TO HAVE without severe contagious effects. But it is too early to
REACHED A NEW CROSSROADS. The question is rule out risks that the process will lead to consequences
whether the positive trend can be strengthened, in an that other euro zone countries find unacceptable. The
environment of continued debt consolidation needs and Spanish government is facing a difficult balancing act. On
persistently high oil prices. To make continued upward the one hand, it must overcome mistrust from the ECB
adjustments in our forecasts possible, it is essential that and from other euro zone countries about whether the
the ultra-loose monetary policy of major central banks government is willing and able to actually implement the
can be implemented without excessively large goal austerity measures it has unveiled. On the other hand,
Economic Insights
there is a risk that domestic protests will grow to turnaround, this illustrates the potential for a positive shift
unmanageable levels. Meanwhile increasingly clear in sentiment if external factors fall into place. Perhaps this
recessionary signals are illustrating the disadvantages of is because companies were afraid of a repetition of the
further budget tightening. The imminent French 2008-09 collapse and this kept them in a depressed mood
presidential election will also fuel uncertainty about the for longer than the actual situation justified. The house
determination to fulfil the economic policy strategy that price downturn that dominated much of 2011 seems to
the euro zone’s core countries have agreed to support. have ended early in 2012, which is another important
Taken together, developments in the euro zone thus piece of the puzzle. The Riksbank’s key interest rate cuts
imply major challenges and risks. have changed household expectations about future
interest rates, while the stock market recovery has
THE RELATIVELY GOOD RESILIENCE OF EMERGING
provided support. Although the home price upturn of
MARKET ECONOMIES has ensured greater stability in the
recent months may not last, it confirms our forecast that
world economy over the past six months. Our main
Sweden can avoid a hard landing in the housing market.
scenario implies a soft landing with GDP growth of 5.7 per
cent in 2012 and 6.0 per cent in 2013, but there are risks GDP growth in Sweden
that must be taken into account in this portion of the 2.5 10
9
global economy as well. A hard landing in the Chinese 2.0
SEB forecast 8
credit or property market still cannot be ruled out. India’s 1.5 7
6
economy is plagued by structural problems and high 1.0
5
inflation pressure, which pose major challenges to 0.5 4
economic policy makers. Unrest in the Middle East – 0.0
3
2
especially Iran’s increasingly tense relations with other -0.5 1
countries – risks driving up oil prices further. Such a -1.0
0
-1
development would not only threaten the immediate -1.5 -2
region but would also jeopardise the world economic Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
10 11 12 13
recovery as a whole. Quarter-on-quarter percentage change (LHS)
Year-on-year percentage change (RHS)
Source: Statistics Sweden, SEB
IN THE NORDIC COUNTRIES, GROWTH WEAKENED
DURING THE FOURTH QUARTER OF 2011 largely in line THESE NEW CONDITIONS ARE CREATING SOMETHING
with our forecasts. The slowdown was primarily OF A DILEMMA FOR THE RIKSBANK. The growth,
attributable to exports, while domestic demand and the unemployment and inflation outlook clearly point towards
labour market were relatively resilient. As in 2008-2009, further key rate cuts. On the other hand, it is obvious that
the Nordic countries have been affected by the crisis in the governor of the Riksbank and several other Executive
ways similar to Germany. This is especially true of Finland Board members see a danger that additional rate cuts may
and Sweden, with their large and cyclically sensitive further inflate home prices and household debts. This is
export sectors. In 2012, GDP growth in Denmark, Finland especially true considering that various international
and Sweden – as in Germany – will end up close to 0.5 per organisations, including the European Commission, have
cent. Because of the exceptional resilience of the raised a clear warning flag in these areas. Our conclusion
Norwegian economy, we predict growth in Norway will is that the Riksbank will hold off on a further rate cut at its
exceed 2 per cent both in 2012 and 2013. April monetary policy meeting, but we are sticking to our
forecast of rate later this year, although the probability of
GDP growth, Nordic countries
these has also diminished.
Year-on-year percentage change (February NO in brackets)
hakan.frisen@seb.se +46 8 763 80 67
2010 2011 2012 2013
Sweden 6.1 3.9 0.7 (0.5) 1.9 (1.7)
Norway 0.7 1.3 2.1 (2.1) 2.4 (2.4)
Denmark 1.3 1.0 0.5 (0.5) 1.4 (1.4)
Finland 3.6 2.7 0.7 (0.5) 1.7 (1.7)
Nordic countries 2.9 2.5 1.0 (0.9) 1.8 (1.8)
Source: OECD, SEB
RECENTLY THE SWEDISH ECONOMY HAS SHOWN
IMPORTANT BRIGHT SPOTS. The Business Tendency
Survey published by the National Institute of Economic
Research in late March demonstrated sharply improved
optimism, especially in manufacturing. Although other
leading indicators have not shown such a clear
2
TUESDAY
U.S. economy on a firmer footing 20 MARCH 2012
• A slowdown in real GDP growth seems increasingly likely in Q1 and we estimate that real
GDP grew at a 2 percent annualized rate in the first quarter, compared to 3.0 percent
in Q4. But the weaker first-quarter growth wouldn’t rule out stronger performance in
subsequent quarters, and since many soft indicators of final demand is strengthening –
our 2012 and 2013 GDP forecasts remain unchanged at 2.5 percent. The
unemployment rate is sliding gradually to 7.4 percent at the end of 2013.
• Although we believe that the recovery is on a firmer footing it is not going to be a straight
line up by any means. Unseasonably warm weather may have boosted activity while high
oil and gasoline prices are beginning to cut into consumer’s purchasing power and growth
prospects in general. Fortunately there are offsets: the looming credit squeeze was averted
and the tail risk of a severe recession in Europe is decidedly lower. Financial conditions
are much easier compared to a few months ago. Employment growth has been
stronger than expected as well, but wage growth remains subdued.
• Arguably too much fiscal tightening too fast is the biggest risk in 2013. Under current law Mattias Bruér
the fiscal tightening is around 4.5 percent of GDP – easily enough to break any recovery. SEB Economic Research
+46 8 763 85 06
Even if only 2 percentage points of tightening actually occurs, it’s still the second largest in
modern history. Don’t look for any clarity until after the November election when action is
needed on a smorgasbord of contentious economic issues, among others the expiring
Bush era tax cuts and the “sequester” which automatically slash federal outlays. This is
why Fed chairman Bernanke is talking about a “fiscal cliff” at year’s end. Our assumption
is that the fiscal headwind will be little more than 1 percent in 2013 which is not
enough to break the recovery. But expect a messy process with possible
macroeconomic as well as debt rating related concerns along the way.
• Our inflation forecasts are revised higher this year on oil. But the upturn is judged to
be temporary and in 2013 both headline and core inflation will be running well below the
target. Consequently, we stick with our forecast of additional QE although it is a close
call.
Key data
Percentage change
2010 2011 2012 2013
GDP 3.0 1.7 2.5 2.5
Unemployment* 9.6 9.0 8.2 7.6
Inflation 1.6 3.1 2.2 1.3
Core inflation 1.0 1.7 1.9 1.3
* Per cent of labour force, yearly averages
Source: SEB
Economic Insight
THE BIG PICTURE
• Currently there is a huge split between the demand side and supply side in the U.S. economy. The supply side
is all good: employment growth is around 250k a month and aggregate hours worked is 3.5 percent above the Q4
average. So what the supply side is suggesting is that growth is running above 4 percent at an annualized rate. The
demand side is a different story: real consumer spending has practically no momentum and both capital spending
and net exports are tracking negative GDP contributions. According to the demand side data alone real GDP
growth could be closer to zero right now. But the housing market is in better shape which is one reason why the
recovery may end up being more sustainable than last year. The glass half full group would point out that housing
only is 2 percent of the U.S. economy, however.
• Soaring oil and gasoline prices are advancing on the worry list. It is not the level but the change in prices that
influences growth, and the rule of thumb we use is that a persistent USD 10 dollar increase in the oil price lowers
real GDP growth by 0.2 percent year one as well as year two. So compared to the October lows we may be looking
at a 0.8 percent drag on real GDP growth in 2011 if oil prices stay where they are for a year all else being
equal (somewhat smaller effects when using yearly averages). Fortunately there are offsets since financial
conditions are much easier today compared to a few months ago and should no longer hurt growth.
• Higher oil prices will push up inflation temporary but further out inflation is expected to run below the
level the Fed is shooting for. As long as inflation expectations are behaving well the Fed will probably look
through any oil-related bounce in inflation. Remember that in January the Fed said that the funds rate is going to be
held to the floor “at least through late 2014” and six of the 17 Fed officials don’t believe they will raise rates until
2015-16. So we remain of the view that the available policy options are 1) an unchanged accommodative monetary
policy stance or 2) additional easing. Higher inflation is making more asset purchases a harder sell but more easing
may come, especially if the economy starts fraying at the edges. Since Q1 real GDP growth is poised to disappoint
we are reluctant to change our forecast of additional policy easing. What has been floating around recently is
“sterilized QE” which could have the potential to stimulate the economy while at the same time subdue worries
about future inflation. As an aside, Bernanke again described U.S. growth as “frustratingly slow” last week.
Meanwhile markets may be in the process of pricing out QE and pricing in an early tightening cycle.
2
Economic Insight
CONSUMER SPENDING / CAPITAL EXPENDITURES
• The trend in real consumer spending is running at a low level and our models do not suggest much improvement
over the near term. Despite faster employment growth and the long and generous arm of Uncle Sam, who
contributes 20 percent of the income pie, weak income growth is holding down consumer spending.
• Whilst growth in real disposable income has trended below real consumption growth since the beginning of 2011,
the drop in the savings rate and the fading fuel shock supported consumption last year. But these tailwinds may be
turning: driven in part by the ratio of household net worth to personal income falling from 650 percent at the bubble
heights to 500 today, our savings model suggests that an uptrend in the savings rate is fundamentally
motivated. When this ratio was at current levels in the past, the savings rate was within the 7-10 percent band with
near consistency. The labor market is the key; stronger employment growth should ultimately fuel income and
spending. A signpost of the current hardship: the number of Americans receiving food stamps is above 46 million.
• Usually the unseasonably warm weather is an argument that the bears are pushing, arguing that the economy has
been artificially strong as a result. But the flip side is that excluding energy, real consumption growth is above 2
percent. In our view what is driving consumption right now is almost exclusively auto related where fleet sales
represent most of the buying. Meanwhile 89 percent of the consumption pie is shrinking and we would like to see
a more broad-based expansion in any event.
millions
millions
3
Economic Insight
THE LABOR MARKET
• The unemployment rate has fallen by 0.8 percentage points since August, to 8.3 percent. More private jobs have
been created since November than in any three-month period since 2006.
• Aggregate hours worked are up 3.6 percent at an annual rate over the last three months. As a standalone
number this is suggesting real GDP growth at around 4.5 percent in Q1.
• But real GDP growth is tracking around 2 percent in Q1 so productivity must be contracting in the current
quarter just as it did a year ago. Whenever this happens, companies move to protect their squeezed profit margins
and respond the following quarter by slowing hiring. Looking back over the past decade this happened every time,
and monthly payrolls, on average, come in 70k lower the following quarter. This is why we caution against
extrapolating current employment trends into the future.
• The progress on the unemployment front has been much faster than justified by the classic Okun’s law, but that is
implicitly assuming that trend GDP growth rate has not changed much. But remember that trend GDP growth is the
sum of labor force growth and productivity growth. While the growth in the labor force has recently picked up, the
productivity trend is running slightly above zero right now. Putting these numbers together they are suggesting that
trend GDP growth has been running below 1 percent for a year now. That can explain the better labor market
outcomes even with “frustratingly slow” growth. Going forward, however, what the pick up in labor force growth is
suggesting is that the lower speed limit is only temporary. Thus, going forward we expect much slower progress
against unemployment even if real GDP growth will be better than last year’s 1.7 percent.
Person (millions)
millions
4
FRIDAY
Japan: the economic recovery is ongoing 21 MARCH 2012
• Real GDP fell 0.75 percent in 2011; the weakest growth in the G7 countries. But leading
Mattias Bruér
indicators and hard data are suggesting above-trend growth at the same time as SEB Economic Research
reconstruction spending is providing support. Real GDP will grow 1.9 percent and 1.3 +46 8 763 85 06
percent in 2012 and 2013, respectively.
• Recent hard data is suggesting that the recovery has become more entrenched: e.g.
machinery orders, industrial production and retail sales were all above expectations.
• After the Bank of Japan intervened earlier this year, the yen has weakened for six weeks
running and the yen is at its weakest level since last spring (summer) against the dollar (euro).
That is good news for competitiveness. Exports have not responded yet, but that is a matter of
timing only since there are lags involved.
• Reflecting the better tone to economic data, the weaker yen and the JPY 65 trillion Asset-
Purchase Program, the Nikkei has trended higher for six weeks in a row. But have a look
and see on the development since the beginning of 2011; over this time period the Nikkei has
traded below other major indices so maybe it can play catch-up; the price-to-book value is still
looking cheap. Just to add some color, the all-time-high was posted in 1989, and the level
today is 75 percent below the highs.
• For the first time in 31 years, Japan showed a trade deficit last year, and in January it posted
its largest trade deficit ever. This raises questions about the prevailing economic structure
with large current account surpluses and net savings. If also the current account surplus turns
into deficit, the consequences may be dramatic since Japan would be forced to import capital
to finance its gargantuan debt load.
• The unemployment rate has drifted higher since September, and was sitting at 4.6 percent
in January. If our GDP forecast becomes reality, the unemployment rate should stabilize and
decline somewhat in 2012-13.
• Japan is massively dependent on foreign oil; arguably a sharp upturn in oil prices is the
biggest near-term risk now when the tail risk of a severe recession in Europe is lower.
• While inflation in year-on-year terms edged above the zero line in January, core inflation
(excluding fresh food) will probably not follow suit for some time yet.
• The structural challenges are enormous indeed: the debt/GDP ratio has risen to a gargantuan
230 percent. Meanwhile the share of the population that tops 65 years of age is at 25
percent and it will keep rising.
Key data
Percentage change
2010 2011 2012 2013
GDP* 4.4 -0.7 1.9 1.3
Unemployment** 5.1 4.6 4.4 4.2
Inflation* -0.7 -0.3 0.1 0.2
Government deficit*** -9.3 -10.3 -11.0 -11.0
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
Source: SEB
Economic Insight
CHARTS ON THE JAPANESE ECONOMY
thousand billions
thousand billions
2
billions millions
CONTINUED…
Economic Insight
billions Percent
millions thousand billions
millions thousand billions
3
MONDAY
China: Weak start for 2012 but no hard landing 26 MARCH 2012
• Distortions due to the Lunar New Year imply that data for January and February are
Andreas Johnson
difficult to interpret but it is clear that activity in the Chinese economy has been SEB Economic Research
weak at the start of 2012. GDP growth in the current quarter is likely to be weak. The +46 8 763 80 32
recent development puts a downside risk to our above-consensus GDP forecast andreas.johnson@seb.se
of 8.7 per cent growth in 2012. However, due to data distortions caused by the Lunar
New Year and models indicating a rebound in activity in April we maintain our forecast for
the time being.
• Headline inflation fell to 3.2 per cent in February. Food inflation dropped from 10.5 per
cent in January to 6.2 per cent. (Chart 1)The large drop in inflation reflects the timing of
the Lunar New Year and headline inflation might rebound somewhat in March, a higher
than expected fuel price increase adding further upward pressure. Lower inflation
provides opportunities for policy loosening in order to stimulate growth.
• Most indicators point to weak growth. A preliminary reading of HSBC’s manufacturing
Purchasing Manager’s Index (PMI) for March decreased to 48.1, putting the recent
rebound in doubt. (Chart 2) The official PMI for March is likely to follow suit and end up
close to or even below 50. Conditions in manufacturing are weak but not consistent
with a hard landing. Leading indicators points to growth below trend. (Chart 3)
• Export and import data are distorted due to the Lunar New Year but export growth is
trending downwards. (Chart 4) The trade balance hit a deficit of 31.5 bn USD in
February, the largest single-month deficit on record. (Chart 5)
• Retail sales are holding up well but industrial production showed the lowest reading
since July 2009 in January/February (Chart 6) Total loans picked up slightly in
February. (Chart 7)
• The gradual cooling of the housing market continues; house prices were flat in
February compared to a year ago. (Chart 8) Construction activity is still strong but project
starts are weak. The government is not ready to relax property market controls yet.
• The depreciation of the yuan towards the USD has slowed down in 2012. (Chart 9)
Premier Wen has stated that the yuan might be close to an “equilibrium exchange rate”.
Key data
Percentage change
2010 2011 2012 2013
GDP* 10.4 9.3 8.7 8.9
Inflation* 3.3 5.4 4.4 4.5
USD/CNY** 6.59 6.29 6.00 5.82
* Percentage change. ** End of period.
Source: National Bureau of Statistics of China, Reuters, SEB.
Economic Insight
CHARTS ON THE CHINESE ECONOMY
2
Euro zone: The risk of a severe recession has
WEDNESDAY
diminished 21 MARCH 2012
• ECB support has averted a credit crunch and stabilised bond markets. The Greek
debt-restructuring (Private Sector Involvement, PSI) was reasonably successful, paving
the way for the second bailout programme and thereby avoiding a disorderly Greek
default for now.
• With the exception of the labour market, some of the recent data has surprised on
the upside, including Q4 GDP, new orders and retail sales. Indicators have
stabilised or recovered slightly although current levels still indicate a fall in activity.
The labour market continues to deteriorate and the recent development has put an
upside risk to our unemployment forecast. Consumer spending remains weak and
contributed to the Q4 fall in GDP.
• In light of the recent data, a stabilisation in financial markets and better prospects for
Germany, we revise our GDP forecast for the euro zone slightly upwards compared to
Nordic Outlook February. GDP is expected to fall by 0.6 per cent in 2012 followed by
a return to positive territory with a weak recovery of 0.8 per cent in 2013. The risk
of a more severe recession in the euro zone has diminished.
• Inflation was 2.7 per cent in February and is expected to moderate during 2012 although
the HICP-forecast has been revised upwards due to rising energy prices. Inflation is
expected to be above the ECB target in 2012 but below the target in 2013.
• The ECB is not expected to make any major changes to its monetary policy stance for the
time being. We expect the refi rate to remain at 1.0 per cent and no new LTROs are
expected in the coming months. Having avoided a credit crunch and so far stabilised
the situation in bond markets the ECB seems content with the support it currently offers.
The ECB also needs some time to evaluate what they call the “extremely complicated”
effects of the LTROs. The policy stance can be interpreted as ECB having put the ball
firmly in the governments’ court; long-term solutions to the euro-crisis rest with
governments.
Andreas Johnson, SEB Economic Research
andreas.johnson@seb.se, +46 8 763 80 32
GDP forecasts Key data
Per cent Percentage change
2011 2012 2013 2010 2011 2012 2013
GDP* 1.8 1.5 -0.6 0.8
Euro zone 1.5 -0.6 0.8
Unemployment** 10.1 10.1 10.6 11.1
France 1.7 -0.3 0.8
Inflation* 1.6 2.7 2.3 1.6
Germany 3.0 0.7 1.4
Government deficit*** -6.4 -4.4 -3.5 -3.0
Italy 0.5 -1.9 0.2
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
Spain 0.7 -1.5 0.3
Source: SEB Source: SEB
Economic Insight
INDICATORS AND GDP
• Most indicators have stabilised or recovered slightly but are still at levels pointing to a fall in activity. The
ESI (Economic Sentiment Indicator) rose for the second consecutive month in February but still points to a fall in
GDP. The composite purchasing managers’ index (PMI) fell to 49.3 in February.
• The German Ifo-index rose for the fourth consecutive time in February and is well above the long-term average.
The ZEW investor sentiment also continues to recover and in March reached its highest level since June 2010.
• Euro zone GDP fell by 0.3 per cent in Q4, in line with the forecast in Nordic Outlook February and slightly better
than the consensus forecast of -0.4 per cent due to better than expected performance in Germany and France. The
decrease in GDP was driven by consumer spending and investment. Italy entered a technical recession in Q4 as GDP
fell for the second consecutive quarter.
• Euro zone GDP is expected to fall by 0.6 per cent in 2012 followed by a weak recovery of 0.8 per cent in
2013. The forecast for Germany has been revised upwards to 0.7 per cent.
GDP growth, quarter-on-quarter
Per cent
Q4 Q3 Q2
Euro zone -0.3 0.1 0.1
France 0.2 0.3 -0.1
Germany -0.2 0.6 0.3
Italy -0.7 -0.2 0.3
Spain -0.3 0.0 0.2
Source: Eurostat, national statistical offices
2
Economic Insight
LABOUR MARKET AND INDUSTRY
• Unemployment in the euro zone rose to 10.7 per cent in January and the figure for December was revised
upwards. The number of unemployed increased by 185 000; the ninth consecutive monthly increase, bringing the
total number of unemployed in the Euro-zone to 16.9 million. January’s weak development along with revisions
puts an upside risk to our labour market forecast.
• Unemployment rose sharply in several of the peripheral and southern euro zone economies in January; the
unemployment rate in Greece reached 19.9 per cent.
• The German labour market is still strong but the rate of unemployment has stopped declining.
• Euro zone unit labour costs are rising slowly after the fall in 2009 and 2010. Unit labour costs in Spain continue to
decrease.
• Manufacturing new orders rebounded in December and beat expectations. Industrial production was very weak
at the end of 2011. Industrial production recovered slightly in January, increasing by 0.2 per cent compared to
the previous month, but is still well below the recent high in August 2011.
3
Economic Insight
FINANCIAL AND MONETARY INDICATORS, INFLATION
• The liquidity provided by the two LTROs (22 December and 29 February) has avoided a serious credit crunch and
diminished the need for the ECB to intervene in secondary government bond markets. The ECB kept its monetary
strategy unchanged in March. No more three-year loans are expected in the months to come and the refi rate
will remain at 1.0 per cent during the forecast period. In ECBs latest forecast, the GDP forecast for 2012 was
revised downwards to -0.1 per cent and the inflation forecast was revised upwards.
• Yield spreads between German government bonds and other euro zone countries have come down since
the beginning of the year but remain elevated. The Greek PSI was successful with a 95.7 per cent participation
rate and a Greek disorderly default was avoided. Bank lending is still weak although there was an improvement in
January. The annual growth rate of M3 rose to 2.5 per cent in January.
• The euro has started to weaken again since the beginning of March providing some stimulus for exports.
Financial stocks have surged by around 20 per cent since the beginning of 2012.
• Inflation was 2.7 per cent in February. The HICP forecast was revised upwards to 2.3 per cent in 2012 and 1.6
per cent in 2013. Core inflation will bottom out at 1.2 per cent in autumn 2012 and reach 1.5 per cent by end-2013.
4
THURSDAY
UK economy: still weak 22 MARCH 2012
• While we maintain a bearish bent on the UK economy, the consensus 2012 GDP
estimates actually ticked higher to 0.6 percent in March. Meanwhile the Bloomberg
average is lower, at 0.2 percent for 2012. We predict GDP growth of 0.4 percent in
2012 and 1.4 percent in 2013, respectively. Recent data, e.g. on industrial production Mattias Bruér
and retail sales suggests that the economy is still weak although some other indicators SEB Economic Research
+46 8 763 85 06
fuel recovery hopes.
• The market is currently looking for 0.4 percent GDP growth at an annual rate in the first
quarter, which implies zero growth compared to the fourth quarter. A flat economy is
consistent with the message from NiESR’s huge macroeconomic model (a pretty
amazing creature that we have used in the past) and our own forecast.
• The private sector continues to add to payrolls while jobs are cut in the public sector.
Since the labor force is growing, the unemployment rate is on a rising trend and at
8.4 percent it is sitting at its highest level since 1995. The unemployment rate is
expected to drift gradually higher in 2012-13. It is already well above the NAIRU which is
why regular pay is trending below 2 percent year-on-year. But the downward pressure on
real wages from inflation is diminishing which will help the recovery to take hold in
2013.
• Inflation continues to decline from the high-water mark in September, and fell from 3.6
percent in January to 3.4 percent in February. While the fall was somewhat smaller than
expected, the trajectory is in line with the MPC’s latest projections. On the margin, our
inflation forecasts are revised higher on oil but we still look for below-target inflation
in 2013. The dovish set of MPC minutes, with two members pushing for more stimulus,
suggest that the door to more QE is still ajar.
Key data
Percentage change
2010 2011 2012 2013
GDP* 2.1 0.8 0.4 1.4
Unemployment** 7.9 8.1 8.7 8.8
Inflation* 3.3 4.5 2.8 1.5
Government deficit*** -10.3 -8.5 -7.0 -6.0
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
Source: SEB
Economic Insight
CHARTS ON THE UK ECONOMY
Percent
2
Economic Insight
CONTINUED…
Real exchange rate M4 growth still negative
Index, 2000 = 100 Year-on-year percentage change
125 125 20.0 20.0
120 120 17.5 17.5
115 115 15.0 15.0
Stronger
110 110 12.5 12.5
105 105 10.0 10.0
100 100 7.5 7.5
95 95
5.0 5.0
90 90
2.5 2.5
85 85
Weaker 0.0 0.0
80 80
-2.5 -2.5
75 75
70 70 -5.0 -5.0
74 77 80 83 86 89 92 95 98 01 04 07 10 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: Reuters EcoWin, SEB Source: Reuters EcoWin, SEB
3
MONDAY
Sweden: Growth forecast largely on track 26 MARCH 2012
 Growth forecast largely on track. The sharp decline in Q4 GDP shows that Swedish Olle Holmgren,
growth is slowing, but exaggerates the underlying weakness. The growth forecast has SEB Trading
been revised upward slightly to 0.7 per cent in 2012 and 1.9 per cent in 2013 Strategy
(previous forecast 0.5 per cent and 1.7 per cent for 2012/13). Signs of stabilisation in the
olle.holmgren@seb.se
Euro zone are supportive, although many problems remain that will affect Sweden.
Growth is likely to be well below trend over the next two years. +46 8 763 80 79
 The sharp decline in Q4 GDP constitutes a downside risk. However, the outcome
doesn’t seem to reflect the underlying trend as sentiment indicators signal a slowdown
rather than a recession.
 Downside risks for the household sector have decreased with rising sentiment and
signs of a relief in the housing market.
 The labour market is slowing down but indicators point to a mixed picture. Employment
has been weak in the beginning of 2012 but unemployment has so far leveled out in line
with our forecast. Furthermore, short-term indictors have only declined moderately. All in
all, our forecast of gradually rising unemployment from mid-2012 is largely on
track.
 CPIF inflation is expected to rise slightly in 2012 from the present low level, partly
due to rising petrol prices. Headline CPI is heading lower due to declining mortgage rates.
 The Riksbank is expected to continue to cut rates to 1 per cent in 2012 due to
rising unemployment and low inflation. The April rate decision is likely to be a close
call but we continue to expect the Riksbank to remain on hold and wait for more
indications on the extent of the slowdown and where the housing market is heading.
 The forecast for government savings has been lowered slightly but Swedish public
finances are still extremely strong in an international comparison.
Swe: GDP Key data
10 2.5 Percentage change
8 2.0
2010 2011 2012 2013
6
% y/y
1.5
GDP* 6.1 3.9 0.7 1.9
4 1.0 GDP working day adjusted* 5.9 4.0 1.1 1.9
% q/q (RHS)
2 0.5 Unemployment** 8.4 7.4 7.6 8.1
0 0.0 Inflation* 1.2 3.0 1.3 1.0
-2 -0.5 Government savings*** 0.0 0.3 -0.5 -0.4
-4 -1.0 * Percentage change, ** Per cent of labour force, *** Per cent of GDP
-6 -1.5 Source: SEB
10 11 12 13
Economic Insight
GDP SLOWING BUT NOT DECREASING
 Weak exports explain most of the fall in Q4 GDP. However, sentiment indictors for the manufacturing sector have
stabilized over the last 3 to 4 months and suggest a more modest decline. We expect exports to recover somewhat
in Q1. Higher goods exports and stronger manufacturing orders and production in January support this assessment.
 Sentiment has been subdued in the domestic sectors as well and production in the service sector was weak in
January. However, sentiment in the retail sector has improved in early 2012 and there are some positive signs also
for other service sectors.
 Fixed investment clearly slowing. So far the slowdown is mainly caused by falling investments in the housing and
in the public sector. Confidence in construction has declined considerably and housing investments are predicted to
decline by 15 per cent in 2012. The manufacturing sector plans to increase investments by 2 per cent in 2012
according to the latest survey. Total fixed investments are expected to be unchanged in 2012 on average.
Swe: Manufacturing sentiment Swe: Economic sentiment and confidence in the service
sector
20 40
120 60
30 115 50
10
20 110 40
0 10 105 30
0 100 20
-10 95 10
-10
90 0
-20 -20
85 -10
-30 80 -20
-30
-40 75 -30
-40 -50 03 04 05 06 07 08 09 10 11
98 00 02 04 06 08 10 12
Economic Sentiment (business + consumer confidence)
Confidence indicator Inflow of new orders Sentiment in the service sector (RHS)
Swe: Production, % y/y, 3-month average Confidence in the retail sector
15 15
40 40
10 10
20 20
5 5
0 0 0 0
-5 -5 -20 -20
-10 -10
-40 -40
-15 -15
-20 -20 -60 -60
-25 -25 -80 -80
04 05 06 07 08 09 10 11 07 08 09 10 11 12
Industry Service sector Durable goods Mostly food Total
Swe: Confidence in construction Swe: Housing starts and residential fixed
75 75 investments, % y/y
175 175
50 50
150 150
25 25 125 125
0 0 100 100
75 75
-25 -25 50 50
-50 -50 25 25
0 0
-75 -75
-25 -25
-100 -100 -50 -50
96 98 00 02 04 06 08 10 12 -75 -75
00 01 02 03 04 05 06 07 08 09 10 11
Building activity, expectations
Order books, outcome Housing starts Residential investments
The confidence indicator Source: Reuters EcoWin
2
Economic Insight
HOUSEHOLD SECTOR AND THE LABOUR MARKET
 Indicators for the household sector have stabilised after the Riksbank rate cut and the recovery in the
stock market. Car registration and retail sales are holding up well, while consumer confidence has recovered.
Private consumption was weak in Q4 2011 (0.7 per cent y/y), but temporary low energy consumption was one
explanation. There has been a downward revision to the household savings ratio implying that household savings
almost entirely consists of mandatory pension savings. However, savings are still high in a historical perspective.
 The downward pressure on the housing market has eased after the Riksbank rate cuts. The SEB housing
price indicator has trended upwards since September 2011 and actual prices have increased over the last 2-3
months according to some sources. We maintain our forecast that house prices are set to decline by 10-15 per
cent over the next two years but downside risks have decreased.
 Employment was weak in the beginning of 2012 while unemployment has stabilised in line with our forecast.
Normally reliable short-term indicators e.g. employment plans in the NIER survey suggest that employment will
continue to rise in the short run. Still, our forecast is that the labour market will weaken and unemployment is
likely to start rising from mid-2012.
Swe: Consumer confidence Swe: Mortgage lending rates and the repo rate
9 325
30 75
8 300
20 50 7 275
6 250
10 25 5 225
4 200
0 0 3 175
2 150
-10 -25
1 125
-20 -50 0 100
-1 75
-30 -75 -2 50
04 05 06 07 08 09 10 11 07 08 09 10 11 12
Consumer confidence 3 - month mortgage lending rates Spread
SEB, housing price indicator Repo rate
Swe: House Prices, index 2005 = 100 Swe: Household savings ratio, % of income
160 160 15 15
Total
150 150
10 10
140 140
130 130 5 5
120 120
0 0
110 110
100 100
-5 -5
90 90 Own financial savings
Ex manatory pension savings
05 06 07 08 09 10 11
-10 -10
93 96 99 02 05 08 11
SCB, houses Valueguard houses
Valueguard, Flats
Swe: Employment according to the NIER survey Swe: The labour market
4 30
3-month average
9.0 Unemployment, %
4700
3 20
8.5
2 10 4650
1 0 8.0
Net balance
0 -10 7.5 4600
-1 -20
7.0 4550
-2 -30
6.5
-3 -40 4500
-4 -50 6.0 Employment, 1000s (RHS)
04 05 06 07 08 09 10 11 5.5 4450
07 08 09 10 11 12 13
Employment, % y/y
Planed employment, business sector (RHS)
3
Economic Insight
INFLATION AND THE RIKSBANK
 Wage agreements are so far in line with our forecast of 3.5 per cent pay increases in 2012. Many negotiations
remain with for example the retail sector expected to agree on new wages in the coming two weeks. There are some
signs of negotiation strains but we expect wage agreements to be reached with out any major strikes.
 The inflation forecast for 2012 has been revised upwards slightly in line with rising petrol prices. CPIF
inflation was 1.1 per cent y/y in February but is expected to rise slightly in 2012 and 2013. Core inflation (CPIF ex
food and energy) is also expected to rise slightly due to diminishing downward pressure from earlier SEK strength
and higher wages. CPIF is still likely to stay well below 2 per cent over the next two years, however
 Declining capacity utilisation in combination with our forecasts for rising unemployment from mid-2012 indicates
that the pressure on the Riksbank to cut rates will remain high. Hence, we forecast the repo rate to be cut to 1
per cent by September this year. The rate decision in April is uncertain but our main scenario is that the Riksbank
will take a pause and leave the repo rate unchanged. We think that the rise in sentiment indicators and a
stabilisation in the housing market will be more important than the lower than expected Q4 GDP.
Swe: CPI, % y/y Swe: CPIF, % y/y
3.5 3.5 2.5 2.5
3.0 3.0
2.0 Riksbank 2.0
2.5 2.5
CPIF SEB
2.0 2.0 1.5 1.5
1.5 1.5
1.0 1.0
1.0 CPI
1.0
0.5 0.5 0.5 0.5
CPIF, ex food and energy
0.0 0.0
10 11 12 13 0.0 0.0
10 11 12 13
Swe: Hourly wages, % y/y Swe: Capacity utilisation indicators
5.0 5.0 2 2
Total economy
4.5 4.5
1 1
4.0 4.0
3.5 3.5
0 0
3.0 3.0 -1 SEB's, indicator -1
2.5 2.5
Business sector
-2 -2
2.0 2.0 Riksbank, RU-indicator
Corrected for historical bias (Riksbank's estimate)
1.5 1.5 -3 -3
01 02 03 04 05 06 07 08 09 10 11 03 04 05 06 07 08 09 10 11
Swe: Lending to households Swe: Government bond spread vs Germany, bps
40 40
15 15 30 30
20 20
13 13
10 10
11 11 0 0
9 9 -10 -10
-20 -20
7 7
-30 -30
5 5 -40 -40
-50 -50
3 3
-60 -60
02 03 04 05 06 07 08 09 10 11
-70 -70
% m/m, annualised, SA, 3 month average 07 08 09 10 11 12
% y/y
4
MONDAY
Norway: Activity running at a solid clip 2 APRIL 2012
 Activity indicators for the first couple of months of the year suggest that overall activity Growth
has started the year on a stronger-than-expected footing. The solid impression fits
with what respondents reported in the most recent report from Norges Bank’s regional
network: output “increased fairly rapidly” in winter while expectations ahead was for Inflation
some moderation (as they tend to be), consistent with growth in mainland GDP – i.e.
excluding oil/gas and shipping – at near 3% year-on-year rate in the first half of 2012.
Labour-market
 Relative to February’s Nordic Outlook, we lift the forecast for growth in mainland GDP
in 2012 to 2.6% from 2.3% while leaving the forecast for 2013 unchanged at 2.9% for
now. Overall GDP is seen rising at a somewhat slower 2.1% rate in 2012 which
nonetheless implies stronger growth than in 2011. We see upside risks to the forecasts.
 The run-up to the wage negotiations has seen the usual rhetoric of putting a lid on wage
growth to stem deteriorating competitiveness in export industries. The trend-setting
negotiation for manufacturing blue-collar workers has broken down with the official
mediator stepping in. Pay increases might be slower than in 2011: according to media
reports, labour unions will trade it for a common paternal leave in the private sector to be
paid for by government. Actual wage inflation in manufacturing is likely to be stronger
than agreed in the central negotiations due to wage drift (local pay), reflecting tight
labour markets. Moreover, wage growth in the dominant public sector might not slow as
much. In all, we expect overall wage growth to ease from 4.2% in 2011 to 3.9% in
2012, yielding a solid increase when adjusted for inflation.
 Norges Bank once again surprised by cutting the key deposit rate 25bps to 1.50% at its
mid-March monetary policy meeting, citing still-lingering concern for global growth and
lower inflation due to NOK appreciation. The bank lowered its optimal rate path quite
markedly, putting any rate hike off to Q3/13. We think a hike will come next spring at the
latest with the end-2013 level at 2.50% or 50bps higher than the rate path suggests.
Stein Bruun, +47 2108 8534, and Erica Blomgren, +47 2282 7277, SEB Norway
Growth is seen holding near trend Key data
Mainland GDP and Norges Bank’s regional network Percentage change
8 4 2010 2011 2012 2013
6 3 GDP 0.7 1.6 2.1 2.4
4 2 Mainland GDP 1.9 2.6 2.6 2.9
2 1 Unemployment* 3.6 3.3 3.3 3.2
0 0
Inflation 2.5 1.2 1.5 1.9
Core inflation 1.4 0.9 1.5 1.9
-2 -1
Government balance** 10.8 13.6 11.5
-4 -2
03 04 05 06 07 08 09 10 11 12
* Per cent of labour force, ** General government, per cent of GDP,
Mainland GDP, % change year-on-year (LHS) forecast 2012 MoF (Oct. 2011)
Regional network output indicator, index (RHS)
Output expectations 6 mth ahead, index (RHS) Source: SEB
Source: Norges Bank, Statistics Norway
Economic Insights
DEMAND AND PRODUCTION
 Momentum in private consumption starts resembling the turn in consumer confidence and firmness suggested by
fundamentals. Real retail sales recovered solidly in January and February, and the indicator measuring consumption
of goods were on average for the two months fully 2.1% above the level in Q4. Even if March should see a marked
payback and Q2 be softer, consumption growth should accelerate from 2.2% in 2012 to a solid 3.0% for all of 2012.
 The short-term trend in manufacturing production (excluding energy) has been choppy since mid-2011, apparently
mirroring a split between healthy domestic demand led by surging oil sector investment and exports feeling chilly
winds from abroad. The 13-point jump in the PMI from December to a 4 ½-year high of 59.7 in March and an even
stronger rebound for the new orders index looks exaggerated but do suggests a more broad-based recovery.
 Real residential investment jumped 22% in 2011 (adding one percentage point to growth in overall GDP), but
following the strong turn since 2009, housing starts have levelled out in late 2011/early 2012. However, surging
orders suggest a looming rebound. In fact, record-high population growth, with an extra boost from still-strong
labour migration, implies that housing starts should surpass the 32.000 average annual level in 2005-07 period
which marked the previous high.
Consumption has firmed in early 2012… … as turn in confidence has suggested
3-month average
16 4 10.0
50
12 3
7.5
40
8 2
5.0 30
4 1
20
0 0 2.5
10
-4 -1
0.0
0
-8 -2
-12 -3 -2.5 -10
03 04 05 06 07 08 09 10 11 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Consumption of goods, % change year-on-year (LHS) Private consumption, % change year-on-year (LHS)
% change from 3 mth. earlier (RHS) Consumer confidence, net balance (RHS)
Source: Statistics Norway Source: Ecowin, Statistics Norway
Choppy momentum in manufacturing, but … … sharp recovery in PMI suggests solid outlook
3-month average
24 6 75 75
70 70
16 4 65 65
60 60
8 2 55 55
50 50
0 0
45 45
40 40
-8 -2
35 35
-16 -4 30 30
01 02 03 04 05 06 07 08 09 10 11 04 05 06 07 08 09 10 11
Manufacturing production, % change year-on-year (LHS) PMI manufacturing (RHS) PMI new orders (RHS)
From 3 months earlier (RHS) Source: Ecowin
Source: Statistics Norway
The upturn in housing starts has levelled off.. .. but orders suggest much more in the pipeline
80 40 11 160
10 140
60
35
9 120
40 8 100
30
20 7 80
25 6 60
0
5 40
20
-20
4 20
-40 15 3 0
01 02 03 04 05 06 07 08 09 10 11 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Housing starts 3 mth. average, % change year-on-year (LHS) Housing starts in 1.000, quarterly average (LHS)
Housing starts in 1.000, 12 mth. aggregate (RHS) Nominal orders new residential buildings, 2Q earlier (RHS)
Source: Statistics Norway Source: Statistics Norway
2
Economic Insights
LABOUR MARKET AND INFLATION
 The labour market continues to exhibit strength, presumably reflecting ongoing solid momentum in the economy.
Employment was thus up an above-trend 2.4% year-on-year on average in December-February (and 0.7% from
September-November). The gain is even stronger than the very solid increase in the labour force, lowering the LFS
unemployment rate to 3.2% in December-February. We expect a broadly unchanged rate trough the year.
 Core consumer prices have yet to show any trend-change as the year-on-year rate on the CPI-ATE measure –excl.
taxes and energy – was unchanged at 1.3% in February, only marginally above the average in H2/11. Norges Bank
for its part cut the inflation forecasts quite noticeably in the March MPR in part as a stronger NOK puts a lit on
import prices (which accounts for almost 30% of the core index). The bank sees core inflation only slightly higher in
the second half of 2012, rising slowly thereafter but holding below the 2.5% medium-term target in 2015.
 Existing home price inflation measured in y-o-y terms has eased, but at 6.8% in March to record-high levels sets
Norway apart from peers. Tighter equity requirements for mortgages (from 10% to 15%) might still have to be felt,
but the fundamental supply/demand imbalance persists: while some 20.000 homes were completed in 2011, new
household formation surpassed 30.000 and the under-supply will thus put a floor under prices in the short term,
Employment growth continues to run strongly Wage growth to moderate slightly in 2012
3-month average
5 6.0 10 0
4 5.5 1
8
5.0 2
3
4.5 6
2 3
4.0
1 4 4
3.5
0 5
3.0
2
-1 2.5 6
-2 2.0 0 7
01 02 03 04 05 06 07 08 09 10 11 87 89 91 93 95 97 99 01 03 05 07 09 11
Employment, % change year-on-year (LHS) Wage growth, % change year-on-year (LHS)
Unemployment, % of labour force (RHS) LFS unemployment rate, reversed (RHS)
Source: Statistics Norway
Source: Statistics Norway
Core inflation shows no definite trend-change Imported goods are denting inflation
Year-on-year percentage change Year-on-year percentage change
7 7 6.0 6.0
6 6 4.5 4.5
5 5
3.0 3.0
4 4
1.5 1.5
3 3
2 2 0.0 0.0
1 1 -1.5 -1.5
0 0
-3.0 -3.0
-1 -1
-2 -2 -4.5 -4.5
02 03 04 05 06 07 08 09 10 11 02 03 04 05 06 07 08 09 10 11
Core CPI domestic goods and services
Consumer prices CPI excl. taxes and energy
Core CPI imported consumer goods
Source: Statistics Norway Source: Statistics Norway
Existing home prices continue to climb .. ..as home completions lag household formation
Thousands
25 35 50 50
20 40 40
30
15 30 30
10 25 20 20
5 10 10
20
0 0 0
15
-5 -10 -10
-10 10 -20 -20
01 02 03 04 05 06 07 08 09 10 11 02 03 04 05 06 07 08 09 10 11
Existing home prices, % change year-on-year (LHS)
No of households, change y/y Housing completions Net balance
Existing home prices per sqm in NOK 1.000 (RHS)
Source: Norw. Ass. of Real Estate Agents Source: Norges Bank, Statistics Norway
3
Economic Insights
MONETARY POLICY AND FINANCIAL CONDITIONS
 Norges Bank surprisingly cut the key deposit rate 25bps to 1.50% on March 14. While growth in the Norwegian
economy is still rather healthy, the bank is still almost solely focusing on the NOK. With the trade-weighted NOK
index expect to remain strong throughout the forecasting horizon, the inflation forecast and rate path was lowered
markedly in the March Monetary Policy Report. The new rate path indicates a key rate at 2.00% and 3.00% by end
2013 and 2014 respectively. We expect the NOK to remain key driver for monetary policy until signs of a global
recovery are more profound. Nevertheless, the strong domestic economy will force Norges Bank to eventually hike
rates ahead of peers; we expect a rate hike in early 2013 and a key rate at 2.50% by the end of next year.
 The recent NOK weakness should be temporary considering a stronger growth outlook and superior fundamentals
relative to peers: we target EUR/NOK at 7.45 by end-Q2. In H2, however, markedly higher FX purchases by Norges
Bank on behalf of the Government Pension Fund Global should weaken the NOK. We expect EUR/NOK to trade in a
7.30-70 range through 2012. Norwegian government bond market has been balancing between capital preservation
inflows from foreigners and front-loaded supply mostly digested by domestic investors. With ~45% of estimated
supply in 2012 done, we see current spread levels vs. Germany as attractive. In May, a new 11y bond will be issued.
Norges Bank sees rates lower for longer.. ..as NOK is expected to remain stronger
Per cent Index
8 8 95 95
7 7 93 93
6 6
91 91
5 5
4 4 89 89
3 3 87 87
2 2
85 85
1 1
0 0 83 83
02 03 04 05 06 07 08 09 10 11 12 13 14 2010 2011 2012 2013 2014
Norges Bank deposit rate Optimal rate path, MPR 1/12 NOK import-weighted NOK assumption MPR 1/12
Optimal rate path, MPR 3/11 NOK assumption MPR 3/11
Source: Norges Bank, SEB Source: Norges Bank, SEB
Low rates spur stronger credit growth Tight spread vs. Germany didn’t hold for long
Year-on-year percentage change Weekly average
25 25 9 200
8
20 20
7 150
15 15 6
5
10 10 100
4
5 5 3
2 50
0 0 1
0 0
-5 -5
01 02 03 04 05 06 07 08 09 10 11
01 02 03 04 05 06 07 08 09 10 11
NOK 10-year government bond yield, % (LHS)
Domestic credit growth Domestic credit to households
Spread vs. Bunds, basis points (RHS)
Credit to non-financial companies Source: Statistics Norway Source: Reuters, SEB
NOK marginally weaker after latest rate cut.. .. but is still stronger than at end-2011
Weekly average Weekly average
10.5 9.0 116 112
10.0 8.5 112 108
9.5 8.0 108 104
9.0 7.5 104 100
8.5 7.0
100 96
8.0 6.5
96 92
7.5 6.0
92 88
7.0 5.5
88 84
6.5 5.0
6.0 4.5 84 80
2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011
NOK trade-weighted (LHS) NOK import-weighted (RHR)
EUR/NOK (LHS) USD/NOK (RHS) Source: Reuters, SEB
Source: Reuters, SEB
4
WEDNESDAY
Denmark: Muddling through still on track 28 MARCH 2012
• Growth moved sideways in the last part of 2011 as export growth slowed and public Growth
consumption kept contracting. The fiscal stance is set to reverse providing an important
growth impetus this year.
Inflation
• Private consumption grew at the end of the year. Even though consumer confidence has
improved on the margin it still points to sluggish consumption in 2012.
• Housing investments started stalling at the end of 2011 after a strong beginning to the year. Labour-market
House prices have resumed the decline and the housing market sees low turnover.
• Fixed investments have held up fairly well and capacity utilization suggests some room for
investments in 2012.
• Manufacturing has staged a rebound alongside PMIs, in line with the global tendency.
However, the latest readings suggest slowing momentum in the short term.
Jakob Lage Hansen, SEB X-asset Research, +45 33281469
Key data
Percentage change
2010 2011 2012 2013
GDP* 1.3 1.0 0.5 1.4
Unemployment** 4.2 4.1 4.3 4.2
Percent (Y-Y)
Inflation* 2.2 2.7 1.7 1.8
Government deficit** -2.6 -3.0 -4.5 -2.5
* Percentage change, ** Per cent of labour force, *** Per cent of GDP
Source: SEB
Percent, 12M
Net balance
Percent (Y-Y)
Net balance
Economic Insight
• The unemployment rate has kept falling. The drop in public employment is moderating, but this year is unlikely to
see a marked improvement in labor markets in general as growth is subdued. Consumers’ expectations of
unemployment have turned less negative, but they still point to higher unemployment in the near term.
• The growth in exports is waning as Denmark’s main trading partners have delivered slower growth. A weaker
effective exchange rate is offering some counterbalance.
• The large current account surplus has persisted and the foreign reserves have grown as the central bank has
defended the peg to the euro. However, some of the positive pressure on the krone has come off as the negative tail
risk in the Eurozone has fallen. The krone level is still relatively strong and the negative policy spread to Euroland
has thus been maintained. The resulting low mortgage yields are providing a cushion for consumers.
• The government has launched another bank package lifting real estate loans off the balance sheets of the large
corporate lender FIH. It will also create a special credit institute extending credit to “well run” agricultural companies
who face tight credit as the sector in general has experienced large capital losses on land putting pressure on banks.
Housing investments and prices
30 15 40
30
20 10
20
10 5
Percent, 12M
%-points (12M)
Percent (12M)
10
0 0
0
-10 -5
-10
-20 -10
-20
-30 -15 -30
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Non-residential investments Capacity utilisation Housing investments House prices
Source: Reuters EcoWin
Percent, 12M
Percent
Exchange rate Danish rates and FX reserves
7 500
110.0
6 450
107.5
400
5
105.0
350
4
102.5
300
3
100.0 250
2
97.5 200
1 150
95.0
0 100
92.5
04 05 06 07 08 09 10 11 12
90 92 94 96 98 00 02 04 06 08 10 12
Danish lending rate Mortgage rate (0-1Y incl. costs)
DKK effective exchange rate ECB repo rate Currency reserve, DKK
Source: Reuters EcoWin Source: Reuters EcoWin
2
MONDAY
Finland: Recent data confirms slowdown 2 APRIL 2012
• The slowdown for major trading partners is affecting the sensitive Finnish economy with
exports ending last year, and starting 2012, on a weak note. Leading indicators have
bottomed out in December 2011/January 2012 and has since showed some
improvements, although they remain at low levels. As has been the case through the
crisis, the service sector sees the outlook as brighter than manufacturing and
construction.
• With exports representing roughly 40 per cent of GDP, the economy will feel more of the
international slowdown; the structure of production with focus on capital and
intermediate goods hold back the development. In 2011, export volumes was more than
15 per cent lower than 2008 and the near term outlook is weak. Monthly data in current
prices showed unchanged exports in January 2012. We expect export volumes to stay flat
compared to 2011.
• The labour market continues to look strong but will be affected negatively ahead. We
adjust our GDP forecast for 2012 and 2013 slightly upwards to 0.7 and 1.7 per cent
respectively from 0.5 and 1.7 per cent respectively in Nordic Outlook, February 2012.
Given this forecast, GDP will just reach its pre-crisis (2008) level in 2013.
Daniel Bergvall, Economic Research, +46 8 763 85 94
Key data
Percentage change
2010 2011 2012 2013
GDP 3.6 2.7 0.7 1.7
Unemployment* 8.4 7.8 7.8 8.0
Inflation 1.7 3.3 2.0 1,9
Government fiscal balance** -2.5 -1,5 -1.7 -0.5
* Per cent of labour force, ** Per cent of GDP
Source: SEB
Economic Insights
GROWTH TO REMAIN WEAK IN THE FIRST HALF OF 2012
• Except for Q3, growth was weak in 2011 and in the last quarter GDP just barely increased (+0.1% q/q). The
development towards the end of the year was in line with Statistics Finland’s monthly GDP indicator and EU
Commission indicators.
• The deteriorating outlook took its toll on business confidence last year, but since the turn of the year, there has
been a slight improvement and stabilisation in confidence. Services are above zero, but for manufacturing and
construction indicators still point at contraction. The indicators for all three sectors are below long term averages.
Even though the sharp dip in exports late last year was a statistical oddity, the development since then has been
weak but more stable.
• After shaking off the worst of the recession fear late last year, confidence among consumers has improved and was
unchanged in March compared to February. Consumer confidence has bounced back since the weak readings late
last year. Consumer confidence and consumption weakened towards the end of 2011 but retail sales for January and
February points towards an improvement ahead (up on average 5.5 per cent on an annual basis). Overall, consumer
spending is expected to hold up relatively well, supported by the labour market.
• Bank (MFI) lending to households and especially to non-financial corporations are rising, reaching just above 8 per
cent on an annual basis in February for the latter. Investments were second after household consumption in
contributing to GDP-growth last year although capacity utilisation is still at a low level, although rising. Capital
spending is expected to level off and increase only slightly in 2012.
• The economy is slowing down, but the labour market still develops favourably. Vacancies are still trending higher
and unemployment continues to fall. In February unemployment stood at 7.4 per cent, down from 8.1 per cent a
year earlier. We expect unemployment to continue to level off at this level and rise again from mid-year.
• Inflation has been stuck around 3 per cent in January and February but is expected to fall, giving a boost to
household real income that together with the labour market will support consumer spending.
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Economic Insights
WEAK GROWTH WILL AFFECT PUBLIC FINANCES, BUT NO IMMEDIATE NEED FOR CONSOLIDATION
• A government surplus in the years leading up to the crisis has put Finland in a better position than many other
economies. General government net lending is expected to worsen somewhat in 2012 compared to 2011, but will
not drop below -2 per cent of GDP. In a euro zone perspective this puts Finland in a favourable position with no or
small need for the government to implement front-loaded budget tightening that would further erode growth
prospects. Instead fiscal policy can be neutral in the short term.
• Noteworthy is that the abated tolerance of high government debt has not affected relatively low indebted
Finland; on the other hand, long term government yields have dropped more than 100 bps in the last year. At the
same time though, the 10-year government bond spread to Germany has doubled from approximately 25 to 50 bps.
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